Hello, everybody. Thank you for joining. Tom O'Malley here. Just kidding. Tim Long sitting in for Tom O'Malley. I'm the IT hardware com equipment analyst at Barclays. Tom couldn't make it today. Trip from his team is here. Very happy to be hosting Western Digital. Kris Sennesael, CFO, thanks for coming with us. I have covered the stock for a fair amount of time in the past. Tom covers it now. Be good to catch up. Obviously, a lot of good things going on with the stock and the industry. Before we get into it, Kris Sennesael, I think you got to start off with the safe harbor.
Thanks for hosting us here, Tim Long, at this great conference. We had a lot of good meetings already. Before we start, my compliance department asked me to make sure that today we will be making some forward-looking statements based on our current assumptions and expectations as it relates to our product portfolio, business plans and performance, market trends, and future financial results. Those forward-looking statements are subject to risk and uncertainties. Please go to our SEC reporting Form 10-K and other filings for more information about the risks and uncertainties that could cause actual results to differ materially from expectations. We also will be talking about some non-GAAP measures, and you can find a reconciliation between GAAP and non-GAAP on our investor website, investor.com or investor.wdc.com.
Okay, great. Thank you.
Got that one.
All right, we're good. I will give an opportunity with about 10 minutes left for folks in the audience to ask a question. You know, first, just maybe just mark to market here a little bit. You know, this year, obviously, there's been a lot of success the last few years with your business. We're starting to see AI industry transferring from a little bit more of a training-based market to inferencing. Could you talk about that transition, how that relates to WDC and HDDs? Do you see that, you know, as a positive, or how do you see that playing into the business?
Obviously, we are very well-positioned as a strategically focused hard disk drive company in this data economy, right? It hasn't been that long. In February of 2025, just after the separation of our Flash business, the management team was indicating that we expect the exabyte growth to be mid-teens year-over-year CAGR for the next 3 to 5 years, with a potential upside if and when AI kicks in. In February of 2026, at our Innovation Day, we've actually already started seeing AI kicking in, and we were comfortable indicating that we now expect, or in February, expect the exabyte growth to be 25% CAGR over the next 3 to 5 years. In the meantime, we have further ongoing discussions with all our customers.
We do get long-term visibility from our customers based on our deep customer engagements that we have. Last week, at our earnings call, we were actually very confident to say that we now expect greater than 25% exabyte growth over the next 3 to 5 year on a CAGR basis. Maybe something trending that starts with a three. What is driving that? First of all, the key growth is still there, right? More and more data is being generated by, I don't know, 7 or 8 billion people on the planet. Every business and enterprise on the company in the world now continues to store all their data. Instead of even not capturing it or throwing it away, all data is being stored.
Now, in addition to that, of course, we do have the AI kicker. There is three main blocks there. First of all, training of the multimodal LLMs is still ongoing. A lot of training has been done. All the big players continue to relearn and retrain their existing models, making continuously improvements, and which will result in the next generation of LLMs. Some of them are also training very specific dedicated language models for specific tasks. That will continue as well. That requires a lot of data. We've also moved already into inferencing, as you indicated. Well, I think all or about this year, two-thirds of the compute power that's installed will be used for inferencing.
What we learn now with inferencing, that it is actually really good for hard disk drive and data storage, because every time you have an interaction with a chat box or even for more complex tasks by agentic AI, where agents now execute complex tasks, all that output is being stored. Not just the output is being stored, but also a lot of data along the way, the reasoning, how they get to certain of those answers, all of that is being stored, so there is a history. Then third, what we also see now is the physical AI, and that's just beginning. Physical AI, robots, humanoids, autonomous driving, autonomous cars, they use a lot of video. All those devices have video. They use a lot of video capturing that's then being used as well to train and optimize the algorithms.
There is actually not enough real-life data to do that, and now they use AI to create synthetic data that's then being used to further optimize the models. When you put this all together, it's really compounding, right? More data for training, more better models, more inferencing. That creates more data that's being fed into the loop, and that all requires storage in the most reliable, economical way, and that's hard disk drives.
Okay. Great. Yeah. There was a lot in there, and I think it leads into the second question pretty well. I think one of the things that people struggle with is, you know, modeling this business. It's not like there's a direct attach per GPU or, you know, when you're thinking about forecasting these, this exabyte growth, do you think about, you know, per gigawatt, per accelerator? You know, how are you trying to formulate, you know, what your growth rate can be relative to what you're seeing from the deployments from your customers?
It's, you're absolutely right. It's hard for us to make a direct link to the number of gigawatts of compute that's being installed. For memory, which is closely attached to all of that, there is a more direct link. As in, as I explained it, right, hard disk drive storage and data storage follows different economics, right? Actually again, it's a compounding loop versus compute, it's being reused, right? You use a couple of seconds of compute power, it generates something. The GPU frees up and can be reused. The output of your inferencing is being stored and will be stored forever, right? It's, it's slightly different.
That's why we, the last 12, 18 months, have really established those deep customer engagements with all the large hyperscalers in the world, in the U.S., in Asia, and other places. We've really worked with our customers to get long-term visibility and ask them the right questions. What are their technology and product roadmaps? What are their roadmaps in terms of data center build-out? How much capacity or exabyte do they think they will need over the next 3, 5-plus years? Based on that, we are developing our own technology and product roadmaps to support that.
Okay. Great. You're leading me right into the technology stuff here. You laid out this roadmap where you're gonna ramp both ePMR and HAMR up to 60 terabytes. Talk to us a little bit about that decision and what that means for customers and your ability to, you know, supply multiple technologies. What are the benefits of that type of strategy?
Yeah. We have an industry-leading technology and product roadmap that is, again, really developed in close relationship with all our customers. For the last 10 years or so, the dominant recording technology was ePMR, right? That's what we use today. Initially, the industry was thinking that we could only get to maybe 30 terabytes on ePMR. Well, we've broken that logic, right? Today, we're already shipping in our latest generation of ePMR up to 32 terabytes, and we found a way to continue to stretch the ePMR technology to 40 terabytes, 50 and 60 terabytes in the future. The 40 terabytes we already have.
It's in qualification with 3 customers right now. We are getting ready for a pretty steep ramp of the 40 terabytes ePMR in the second half of calendar year 2026. In parallel, for the last 10 years, we have been working on the next-generation technology, which is HAMR. We are in a really good spot there. We are going to launch the product, start ramping it in calendar year 2027 with 44 terabyte solutions. That is currently in qualification with 4 customers. We are getting really good feedback from our customers. They are really happy with the performance, the quality, the reliability of the product, how it performs into their qualification systems. They are really happy with the areal density, as I said, up to 44 terabyte per drive.
We still have a little bit more work to do, but we're not rushing it because we have our ePMR technology that goes in parallel to our HAMR technology that kind of de-risks it for our customers and de-risk it for ourselves, and we think that's the right way to play it.
Okay. Maybe just digging into the HAMR a little bit. There's still a little room to go. Positive feedback so far. What are, kind of, some of the technical milestones that you think you need to hit, and what's the current view on, kind of, availability and revenue timeline for some of the HAMR products?
Yeah. Again, we're working on it for 10 years. It's a new technology, right? It's heat-assisted magnetic recording that requires some redesign of the head, including the integration of a laser. It requires some modifications on the substrates and the media to do the magnetic recording. Again, we figured it out, and we're finally getting to a point here now that we are in qualification with four customers and getting ready for the ramp in 2027. By the way, HAMR is not just about getting to 44 terabytes per drive. We believe that with HAMR, over time, we will get to 50, 60, 70, and eventually more than 100 terabytes per drive, right? That is the technology. We invest in that.
By the way, we're also investing already in the next generation technology that will probably come to market 10 years down the road, which is called HDMR, Heat Dot Magnetic Recording.
Okay. Yeah, I hope I'm not doing this in 10 years to ask you about it. Maybe I will be, I don't know. We'll see. Some other new product developments, you talked about addressing bandwidth and power, the High-Bandwidth Drives and dual pivot actuators. Could you talk a little bit about those technologies' timelines? Was this customer push? Was it, or customer pull or WD push and, you know, it's obviously addressing some bottlenecks, so what do you think the outlook or, you know, the opportunity for WD in these areas are?
Yeah. If you look today, in data centers in the cloud, roughly 80% of the data is being stored on hard disk drive, right? The remainder 20% is stored on SSDs or NAND or Flash or whatever you want to call it. Despite the fact that that is a lot more expensive in terms of cost of acquisition and in terms of total cost of ownership, Flash, SSDs is a lot more expensive. Why is it not 100% on hard disk drive? Well, Flash, SSDs, they have a performance advantage. They have faster in and out, and higher throughput and better speed than hard disk drives.
Our customers, of course, they asked us, "Can you improve your speed and throughput?" We have smart engineers who looked at it and we found ways to drastically, up to 8 times faster, right, increase the speed and the throughput of the current hard disk drives. It's something that we've announced on Innovation Day. It's called High-Bandwidth Drives, right? Most of that is being done in firmware and software, and that in combination with dual pivot, which is a hardware solution, right, will get us to those solutions. Currently, we are shipping samples to two of our customers. So far, the feedback is very positive. They really like what we see. It's something, again, the customers want it, the customers need it.
It's important to potentially for us to expand a little bit into the more warmer and/or hot data with higher throughputs. We also need it as we move to higher capacity drives, 50, 60, all the way up to 100 terabytes.
Okay. Want to get into some of the, you know, the business type questions here. Maybe just starting structurally here, you know, HDDs are now vast majority going to the hyperscalers. Could you talk about how the relationships are changing, whether it's, you know, contract terms, prepayments, guarantees, LTAs? Maybe just give us a sense of kind of how things are structurally changing 'cause there's such tight supply and such high demand.
I mean, again, our business has changed drastically for many reasons, right? Even if you look back a couple of years ago, more than 50% of the business was still client, consumer, and then we started moving into the cloud with the hyperscalers and some of the enterprise cloud providers as well. Fast-forward to today, 90% of our business is cloud, right? Mostly with the hyperscalers. We still have 5% of our revenue in consumer and 5% of our revenue in a client with the PC business. The vast majority is cloud with the hyperscalers, and we've completely changed the business engagements model, right? I mean, it used to be in the past that it was turns business. We were taking orders for shipments in the same quarter. That is no longer the case.
We went to, again, our major customers. We explained them our technology and product roadmap. We invited them to our factories, and we showed them it actually takes almost a year to produce a hard disk drive. Nine months for the wafers that eventually turns into heads, and then three months to put it all together and test it. We, again, we've completely changed the business engagement model. We get a lot more information from our customers. We provide a lot more information to them, and we've learned from each other that creating better visibility in the long-term benefits both of us, right? Now we do have better visibility from our customers in some cases, all the way stretching out 3, 4, 5 years, right?
While we're having those discussions with our customers, we made it clear that, first of all, you have to place your orders 52 weeks in advance. We have purchase orders for the next 52 weeks, right? Of course, that has volume, price, and the exact SKU that we're going to ship to them all fixed. They also said, "Hey, we want to secure our supply for longer period of time." That's where we entered with a lot of the large customers into LTAs covering all of calendar year 2027. With some of them, we actually covered calendar year 2028, and with some of them, all the way going into calendar year 2029. Those LTAs, they have a volume and a price component in baked in. The volume there, of course, there is some flexibility there, right?
In some cases, they might need a little bit more, and we will try to get them more at potentially different pricing. In some cases, maybe some customers need a little less. The sooner you tell us, the better. Maybe we can move that supply to another customers. We might, of course, there might be some different pricing as a result of that. That's all baked in those relationships. I think for me, LTAs, it's a big word. For me, the most important thing is, again, better visibility, partnership, collaborating with technology and product roadmaps, creating more supply. Back to maybe your other question, right? We see very strong demand.
We believe the next 3 and 5 years, we will be able to supply that strong demand growth, not by adding unit capacity, but by working on our technology and product roadmap, moving to those higher capacity drives in strong collaboration with our customers, right? Because they have to adopt those new technology, and they have to adopt those higher capacity drives. We're moving more and more customers to UltraSMR from CMR, which gives them a 20% boost, and that needs to all happen together in collaboration and that's more important to me than a piece of paper which is called LTA.
Right. Right. Yeah, just to dig into it a little bit, 2 follow-ups. One, I think you talked about this year mid-high single-digit year-over-year ASP increase each quarter. Is it safe to assume when you're looking at the LTAs that go to 2027, 2028, 2029, we're factoring in, you know, similar-ish type of, or ASP increases, number 1. Number 2, I know you made the point before, and I agree this is very different than NAND DRAM. Obviously, those prices are going up much more dramatically. Maybe just bridge that for us, and does that mean at some point there is even more opportunity on the pricing side? Because some of the other, you know, related semiconductor areas are seeing more.
We obviously feel really good about the pricing environment. We do play it completely different than the memory side, which is more of a commodity and a commodity trade, right? We play the mid- to long-term relationship with our customers and our partners, and our pricing is based on value, right? The more value we provide to our customers, the more we want to get paid for that, right? How do we provide more value? Well, by moving to higher capacity drives, right? Moving to higher capacity drives have all kind of benefits for our customers. Better rack density, lower real estate cost, lower power consumption. We can actually charge them a little bit more on a price per terabyte basis and still delivering a lower total cost of ownership, which is a win-win for all of us.
Obviously, operating in a very strong demand environment with supply that comes online as we execute our technology and product roadmap, that obviously helps. Currently, we are seeing price per terabyte increases in the mid to high single digits. Last quarter, it was 9% up year-over-year. At the Innovation Day, I do expect for all 4 quarters of calendar year 2026, ASP per terabyte to be up mid high single digits. Again, we're executing to that. Yes, I do believe that longer term, there is further opportunity to improve the pricing as we deliver more value to our customers.
Okay, we did have a question. I'm assuming it's related. Can we get that microphone there, please?
Yes, thank you very much. I just have two follow-up questions on the LTA. If some customers are eager to sign LTAs, if another group of customers, they don't sign LTAs, what would happen to those customers who don't want to sign LTAs?
Nothing, right? Again, we have a set of customers. It's a limited set of customers, right? You have four or five, maybe six large hyperscalers in the U.S. You have a couple of large hyperscalers in Asia. You have some smaller and upcoming cloud players out there. That's the set of customers. We have relationships with all of them, so we don't actually care too much who's a winner and who grows faster than the other one, because we deal with all of them. Our market share with each of those players is all or about the same. We want to make sure, of course, that we have supply allocated to each and all of those players.
Even if you have an LTA, if you don't have an LTA, it doesn't really matter, right? For me, LTA is a piece of paper. We have customer relationship, customer engagements. That's the most important thing.
Thank you. My second question is, if one customer, because the company mentioned for capacity increase is really for, through a product upgrade, and if one customer is willing to, say, co-invest with Western Digital, let's say, put a 50% CapEx down on the table and then just physically to increase production capacity with you, and will you be willing to take that offer and to physically increase production capacity or the factories to push volume up?
Right. The answer is no, right? Again, we're In memory, we start seeing that, but memory is a totally different business than hard disk drives, right? Memory has really high CapEx requirements. They need to go build new factories to go support the incremental demand. In hard disk drive, the CapEx is very low. It's 4%-6% to revenue, right? We don't need to add more unit capacity. We can increase our supply somewhat in line with the strong demand that we see by moving up to higher capacity drives, and that's the answer.
Thank you.
All right, maybe I'll see if there's any other before while the mic is out. Any? Oh, there's one over here.
This may be a question on potential new or upcoming competitors. This is, of course, by history a very, let's say, oligopolistic industry. We've seen some competitors emerging over the years in the DRAM and NAND space in China. Can you share something maybe a bit, say, from your side of the business, what you're seeing out there?
Today, in the hard disk drive, there's basically three players. Two large players, including Western Digital, and then a third smaller player. We don't see other new entrants in that business because it's really hard and difficult business with really high barriers to enter, right? I mean, you need to know how to make heads that does write and read, right? It's a very complex, specialized technology that goes through a nine-month wafer fabrication process. Very complex and hard and difficult to do. It's not your typical CMOS or other semiconductor thing. In addition to that, you need to know about magnetic recording, the substrates, the media, and how you condition that, and then being able to bring that all together in high volume production.
Again, we know a little bit about hard disk drives because we've been doing it for 55 years. It still takes us 10 years to develop the next generation technology, right? We've been working 10 years on HAMR, and now HAMR is ready. We start working on HDMR, which will probably take us another 10 years. We don't see new entrants trying to get into this space because it's really hard.
Any others? All right, I'll go back to the list here. Why don't you talk a little bit about gross margin? You kind of touched on, you know, some peripheral areas now. You know, I stopped covering the stock. I think the stock 5 years ago was in the low 20s, and now you're well more than double that. Maybe just talk a little bit about, you know, gross margin sustainability. Obviously upping your exabyte growth rates helps. Talk a little bit about introducing HAMR into the mix. You know, not necessarily adding physical capacity, adding higher products. Maybe just break us down all the moving parts as you look at gross margin sustainability over the next few years here.
Yeah, no, I feel really good about the gross margin. Again, this is a totally different business than it was three or five or 10 years ago, where margins for a very long period of time were 20%, right? Here, I mean, the value of data has increased a lot and we add more and more value to our customers by moving to those higher capacity drives. And you're looking at gross margin has moved from 20s to 30s to 40s. Last quarter, we were the first one crossing into something starting with a five handle at 50.5%. We guide it to 51%-52% for this quarter.
We do see further gross margin expansion as ASP per terabyte continue to go up and as the cost per terabyte continues to go down, both driven by moving to higher capacity drives, which, as already explained, we will move from 30s to 40s to 50s to 60s, eventually to 100 terabytes, right? HAMR is an important part of that because, again, with ePMR, we think we can only get to 50, 60 terabytes, so we need to get HAMR going because that gives us the path to get to more than 100 terabytes over time. HAMR, again, we're not rushing into it because we have this dual track with ePMR and HAMR. HAMR by itself, there's some structural difference there that adds a little bit of cost, right?
You need to add a laser per head, and you have a little bit more expensive media to deal with as well. You get the cost benefit by moving to higher capacities per drive. Combine all of that, again, I feel really good about where gross margins are and further progression and expansion of the gross margins over time.
Okay. Yeah, it could be all that, or it could be the hardware guy stopped covering you and the semi guy started covering you, and everything's better in life. You know, I get that a lot. You know, you mentioned lasers and HAMR. Last earning call, you did talk about acquiring some IP and talent, you know, for HAMR internal development. Could you talk a little bit about that decision? You mentioned it's, you know, it's obviously an incremental cost item and complexity. Maybe talk about how you think that work, you know, how big of a role will WD take in that vertical integration relative to merchant? What do you think that could mean for, you know, margin structure and quality of product and everything else?
No, no, it is important because, again, HAMR is heat-assisted magnetic recording. Basically what we do is there's a laser that's attached to the head that before you flip the bit 1 to 0, you heat up the media and that helps to drive further areal density. We do have an external source of the laser, but we thought it is a critical component in our overall HAMR technology roadmap. We wanted to do it internal as well.
We acquired some IP and some know-how and some smart people, now we working in parallel on working with our external source and an internal source that will further help us to improve the areal density in HAMR, that will also eventually allow us to more closely integrate the laser into the head itself, which will also then create some more space and help us to put more platters into the box as well. There's a lot of performance advantages, integration advantages, eventually that will also then result in cost advantages by doing it in-house and integrated.
What would the timeline for this type of integration be?
Yeah. I mean, this is something that we are working on in right now, but that is, I mean, we will continue to make it smaller and further integrate it into the heads over the next two, three, five years. It's a long-term project.
Follow-up on lasers. You spoke about vertically emitting lasers, with a shorter term form factor, allowing you to compress the space between platters and ultimately more disks inside a drive. You know, talk a little bit about the advantages there and the timeline there and how that helps scale capacity.
Again, for us, the most important thing is areal density. We're really focused on increasing the areal density per platter, and there's a lot that needs to happen. We need to get better heads for that. We need to get better media for that. But we are on track. I mean, today we figured out how to get to 4 terabytes per platter, and we have a path to get to 5, 6, 7, and eventually 10 terabytes per platter, right? That is the most important thing. Now, in addition to that, we also look at how, is there a possibility to put more platters in a box without changing the physical structure of the box, right? We, again, are industry-leading there. We already have 11 platters in a box.
We know how to get to 12 and eventually to 14, and potentially more after that. That's the two items that we focus on to continue to drive to higher capacity drives.
Okay. I have any Just wanna give one more chance for anybody. Yeah, oh, yeah, one more.
I'm just sort of asking a question again, sort of from the angle what sort of maybe disrupts, let's say, this very optimistic future in a way. If we look at sort of at logic or the discussions around GPU today, there are new sort of chip architectures coming to the market, which maybe do inference more efficient, hence less computing power to the. On the storage side, you mentioned sort of the amount of data which needs to be put away and used again. If you would have to sort of put a black hat on, where is the vulnerability in the way of this, let's say, positive projection going?
Where is the?
The vulnerability or the weak spot.
To be honest, I don't see it. I mean, we are the most efficient, scalable, reliable, with very strong economics for our customers. Very strong economics for our customers, right? A way of storing massive amounts of data. We don't see any hesitation from our customers. I mean, AI is a data-driven economy, right? It all is based on massive amounts of data and data storage. We provide that to our customers in a very lucrative, economical, scalable way to them, right? I don't see that. Based on all the conversations I have with my customers, I don't see that. I mean, in the past, there was this idea about like, "Oh, SSDs are gonna replace hard disk drives in the cloud," right?
I mean, if you go back a couple years ago, that was the case in the PC, right? Where hard disk drives were in the PC, did get replaced by SSDs in the PC. Fair. All right. Right? Maybe one or two years ago, some folks believed that that was gonna happen in the cloud as well. I don't see that. I don't see that. Just based on total cost of ownership differential, cost of acquisition differential, and just the overall performance of, and technology and product innovation that we continue to do, not only by going to higher capacity drives, but also improving the overall performance, throughput and speed of our hard disk drives. I don't see anything else that could disrupt that.
If people say that a lot of inference is going to the edge or on the device, is that a negative or not necessary?
No. I mean, eventually data is being stored and the vast majority of data is being stored in the cloud. Even if there is some local compute or local inferencing on the site, in many cases that got all uploaded into the cloud as well.
Yeah. 1, We'll try to be quick with these 2.
If China decided it was a national strategic, you know, priority to disrupt you or displace you on a 10-year view, they don't have a chance either if they threw everything at it?
They've already tried it twice and couldn't get it done. We don't see them trying again, but maybe tomorrow they can, and then maybe 10 years down the road they might succeed in that or not.
Yeah, I mean, partly linked to that. Just, what are the biggest obstacles to you increasing supply? What are the physical limitations you have in your own supply chain, your own ability to build as you compared to the memory example being obviously heavy CapEx, fab build out? What's the equivalent for you in that regard? I guess linked to that, but not wholly linked to that, is what therefore prevents these levels of situation and margins, someone else saying, "Actually, we can also do that." What's the biggest barriers to that? Thank you.
Right. I don't need to increase my capacity or let me be clear, I don't need to increase my unit capacity. I don't need to produce more hard disk drives. I can supply the very strong demand growth by moving to higher capacity units. Right. That's why my CapEx will continue to stay in the 4%-6%.
The biggest barrier to facing vertical monopoly.
Again, but I mean, making heads is a very complex, hard thing to do, right? You need years and years and years of experience. You can't go to TSMC and say, "Make me some heads." It's a very specialized, unique technology. Then the substrate and media magnetic recording, is something that requires years and years and years of technology and innovation. Being able then to bring that all together in a box, is just hard to do.
Thank you.
Okay. I think we are up on time. Kris, really appreciate it. Thank you very much.
Thank you.
Thanks to everybody for joining.
Thanks, Tom.